DCO-Q1 2015 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________________________
FORM 10-Q
 _________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-8174
 _________________________________________________________
DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
 _________________________________________________________
Delaware
 
95-0693330
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
23301 Wilmington Avenue, Carson, California
 
90745-6209
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (310) 513-7200

(Former name, former address and former fiscal year, if changed since last report)
 _________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of May 1, 2015, the registrant had 11,055,037 shares of common stock outstanding.


Table of Contents

DUCOMMUN INCORPORATED AND SUBSIDIARIES
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
PART II. OTHER INFORMATION
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 6.
 
 
 


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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)

 
 
April 4,
2015
 
December 31,
2014
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
32,705

 
$
45,627

Accounts receivable, net of allowance for doubtful accounts of $189 and $252 at April 4, 2015 and December 31, 2014, respectively
 
90,912

 
91,060

Inventories
 
141,443

 
142,842

Production cost of contracts
 
11,115

 
11,727

Deferred income taxes
 
13,783

 
13,783

Other current assets
 
19,485

 
23,702

Total Current Assets
 
309,443

 
328,741

Property and Equipment, Net
 
99,998

 
99,068

Goodwill
 
157,569

 
157,569

Intangibles, Net
 
152,596

 
155,104

Other Assets
 
6,321

 
7,117

Total Assets
 
$
725,927

 
$
747,599

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Current portion of long-term debt
 
$
27

 
$
26

Accounts payable
 
58,577

 
58,979

Accrued liabilities
 
41,659

 
52,066

Total Current Liabilities
 
100,263

 
111,071

Long-Term Debt, Less Current Portion
 
280,019

 
290,026

Deferred Income Taxes
 
70,199

 
69,448

Other Long-Term Liabilities
 
19,938

 
20,484

Total Liabilities
 
470,419

 
491,029

Commitments and Contingencies (Notes 9, 11)
 

 

Shareholders’ Equity
 
 
 
 
Common stock - $0.01 par value; 35,000,000 shares authorized; 10,997,241 and 10,952,268 issued at April 4, 2015 and December 31, 2014, respectively
 
110

 
110

Additional paid-in capital
 
72,992

 
72,206

Retained earnings
 
188,932

 
190,905

Accumulated other comprehensive loss
 
(6,526
)
 
(6,651
)
Total Shareholders’ Equity
 
255,508

 
256,570

Total Liabilities and Shareholders’ Equity
 
$
725,927

 
$
747,599

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)

 
 
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
 
 
 
 
As Restated
Net Revenues
 
$
172,920

 
$
179,753

Cost of Sales
 
146,159

 
143,838

Gross Profit
 
26,761

 
35,915

Selling, General and Administrative Expenses
 
23,134

 
21,087

Operating Income
 
3,627

 
14,828

Interest Expense
 
(6,661
)
 
(7,125
)
(Loss) Income Before Taxes
 
(3,034
)
 
7,703

Income Tax (Benefit) Expense
 
(1,061
)
 
2,544

Net (Loss) Income
 
$
(1,973
)
 
$
5,159

(Loss) Earnings Per Share
 
 
 
 
Basic (loss) earnings per share
 
$
(0.18
)
 
$
0.48

Diluted (loss) earnings per share
 
$
(0.18
)
 
$
0.46

Weighted-Average Number of Common Shares Outstanding
 
 
 
 
Basic
 
10,964

 
10,844

Diluted
 
10,964

 
11,107

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
 
 
 
 
As Restated
Net (Loss) Income
 
$
(1,973
)
 
$
5,159

Other Comprehensive Loss
 
 
 
 
Amortization of actuarial losses and prior service costs, net of tax benefit of approximately $97 and $36 for the three months ended April 4, 2015 and March 29, 2014, respectively
 
(125
)
 
(69
)
Other Comprehensive Loss
 
(125
)
 
(69
)
Comprehensive (Loss) Income
 
$
(2,098
)
 
$
5,090

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
 
 
 
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
 
 
 
 
As Restated
Cash Flows from Operating Activities
 
 
 
 
Net (Loss) Income
 
$
(1,973
)
 
$
5,159

Adjustments to Reconcile Net (Loss) Income to
 
 
 
 
Net Cash Provided by (Used in) Operating Activities:
 
 
 
 
Depreciation and amortization
 
6,914

 
7,426

Stock-based compensation expense
 
1,624

 
364

Deferred income taxes
 
751

 
(604
)
Excess tax benefits from stock-based compensation
 
(109
)
 
(124
)
Recovery of doubtful accounts
 
(62
)
 
(62
)
Other
 
643

 
(757
)
Changes in Assets and Liabilities:
 
 
 
 
Accounts receivable
 
210

 
(8,599
)
Inventories
 
1,399

 
(8,388
)
Production cost of contracts
 
95

 
513

Other assets
 
4,412

 
5,440

Accounts payable
 
342

 
(4,138
)
Accrued and other liabilities
 
(10,761
)
 
(6,067
)
Net Cash Provided by (Used in) Operating Activities
 
3,485

 
(9,837
)
Cash Flows from Investing Activities
 
 
 
 
Purchases of property and equipment
 
(5,572
)
 
(2,192
)
Proceeds from sale of assets
 
9

 
5

Net Cash Used in Investing Activities
 
(5,563
)
 
(2,187
)
Cash Flows from Financing Activities
 
 
 
 
Repayment of term loan and other debt
 
(10,006
)
 
(7,506
)
Excess tax benefits from stock-based compensation
 
109

 
124

Net proceeds from issuance of common stock under stock plans
 
(947
)
 
7

Net Cash Used in Financing Activities
 
(10,844
)
 
(7,375
)
Net Decrease in Cash and Cash Equivalents
 
(12,922
)
 
(19,399
)
Cash and Cash Equivalents at Beginning of Period
 
45,627

 
48,814

Cash and Cash Equivalents at End of Period
 
$
32,705

 
$
29,415

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Interest paid
 
$
11,397

 
$
11,397

Taxes paid
 
$

 
$
58

Non-cash activities:
 
 
 
 
     Purchases of property and equipment not paid
 
$
714

 
$
182

See accompanying notes to condensed consolidated financial statements.

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Ducommun Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun,” the “Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions. The December 31, 2014 condensed consolidated balance sheet data was derived from audited financial statements, but does not contain all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
Our significant accounting policies were described in Part IV, Item 15(a)(1), “Note 1. Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2014. We followed the same accounting policies for interim reporting. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state our condensed consolidated financial position, statements of income, comprehensive income and cash flows in accordance with GAAP for the periods covered by this Quarterly Report on Form 10-Q. The results of operations for the three months ended April 4, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.
Our fiscal quarters end on the Saturday closest to the end of March, June and September for the first three fiscal quarters of each year, and ends on December 31 for our fourth fiscal quarter.
Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
Use of Estimates
Certain amounts and disclosures included in the unaudited condensed consolidated financial statements required management to make estimates and judgments that affect the amounts of assets, liabilities (including forward loss reserves), revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Restatement of Previously Issued Consolidated Financial Statements
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we have restated our consolidated financial statements as of December 31, 2013, and for the years ended December 31, 2013 and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-term contract following the discovery of misconduct by employees in the recording of direct labor costs to the contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time; and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011. In addition, the restated amounts include previously identified and disclosed immaterial adjustments. We have reflected our restated unaudited quarterly condensed consolidated financial information as of and for the quarter ended March 29, 2014 herein. See Note 2 for additional information.
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace, defense, industrial, natural resources, medical and other industries. Our subsidiaries are organized into two strategic businesses: Ducommun AeroStructures (“DAS”) and Ducommun LaBarge Technologies (“DLT”), each of which is a reportable operating segment. DAS designs, engineers and manufactures large, complex contoured aerospace structural components and assemblies and supplies composite and metal bonded structures and assemblies. DAS products are used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft. DLT designs, engineers and manufactures high-reliability products used in worldwide technology-driven markets including aerospace and defense, natural resources, industrial and medical and other end-use markets. DLT’s product offerings range from prototype development to complex assemblies. All reportable operating segments follow the same accounting principles.

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Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share are computed by dividing income available to common shareholders plus income associated with dilutive securities by the weighted-average number of common shares outstanding, plus any potential dilutive shares that could be issued if exercised or converted into common stock in each period.
The net earnings, weighted-average number of common shares outstanding used to compute earnings per share were as follows:
 
 
 
(In thousands, except per share data)
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
 
 
 
 
As Restated
Net (loss) earnings
 
$
(1,973
)
 
$
5,159

Weighted-average number of common shares outstanding
 
 
 
 
Basic weighted-average common shares outstanding
 
10,964

 
10,844

Dilutive potential common shares
 

 
263

Diluted weighted-average common shares outstanding
 
10,964

 
11,107

(Loss) earnings per share
 
 
 
 
Basic
 
$
(0.18
)
 
$
0.48

Diluted
 
$
(0.18
)
 
$
0.46

Potentially dilutive stock options and stock units to purchase common stock, as shown below, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these shares may be potentially dilutive common shares in the future.
 
 
(In thousands)
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
Stock options and stock units
 
916

 
254

Cash and Cash Equivalents
Our cash accounts are not reduced for checks written until the checks are presented for payment and paid by our bank. Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. These assets are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value below.
Provision for Estimated Losses on Contracts
We record provisions for the total anticipated losses on contracts considering total estimated costs to complete the contract compared to total anticipated revenues in the period in which such losses are identified. The provisions for estimated losses on contracts require us to make certain estimates and assumptions, including those with respect to the future revenue under a contract and the future cost to complete the contract. Our estimate of the future cost to complete a contract may include assumptions as to improvements in manufacturing efficiency, reductions in operating and material costs, and our ability to resolve claims and assertions with our customers. If any of these or other assumptions and estimates do not materialize in the future, we maybe required to record additional provisions for estimated losses on contracts.
Inventory Valuation
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market value for raw materials is based on replacement costs, and is based on net realizable value for other inventory classifications. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) incurred. Costs under long-term contracts are accumulated into, and removed from, inventory on the same basis as other contracts. We assess the inventory carrying value

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and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. We maintain an allowance for potentially excess and obsolete inventories and inventories that are carried at costs that are higher than their estimated net realizable values.
Production Cost of Contracts
Production cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded to cost of goods sold using the units of delivery method. We review long-lived assets within production costs of contracts for impairment on an annual basis (in the fourth quarter for us) or when events or changes in circumstances indicate that the carrying value of our long-lived assets may not be recoverable. An impairment charge is recognized when the carrying value of an asset exceeds the projected undiscounted future cash flows expected from its use and disposal.
Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1, the highest level, refers to the values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values estimated using significant unobservable inputs.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, as reflected in the condensed consolidated balance sheets under the equity section, was comprised of cumulative pension and retirement liability adjustments, net of tax.
Recent Accounting Pronouncements

Recently Issued Accounting Standards

In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05”), which provides guidance on fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which will be our interim period beginning January 1, 2016. Early adoption is permitted. We are evaluating the impact of this standard but currently do not anticipate it will have a significant impact on our condensed consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of those costs is reported as interest expense. The new guidance is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which will be our interim period beginning January 1, 2016. Early adoption is permitted. We had approximately $5.6 million of debt issuance costs and approximately $280.0 million of total debt as of April 4, 2015, and thus, we do not believe that adoption of this new guidance will have a significant impact on our condensed consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)” (“ASU 2015-01”), which eliminates from U.S. GAAP the concept of extraordinary items. Current guidance requires separate classification, presentation, and disclosure of extraordinary events and transactions. In addition, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. The new guidance is effective for annual and interim periods within those annual periods, beginning after December 15, 2015, which will be our interim period beginning January 1, 2016. Early adoption is permitted provided it is applied from the beginning of the annual period of adoption. We are evaluating the impact of this standard but currently do not anticipate it will have a significant impact on our condensed consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40):

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Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which defines management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern. ASU 2014-15 also provide principles and definitions that are intended to reduce diversity in the timing and content of disclosures in the financial statement footnotes. The new guidance is effective for annual periods ending after December 15, 2016, which will be our year ending December 31, 2016, and interim periods beginning after December 15, 2016, which will be our interim period beginning January 1, 2017. Early adoption is permitted. We are evaluating the impact of this standard but currently do not anticipate it will have a significant impact on our condensed consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period” (“ASU 2014-12”), which requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. Thus, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The new guidance is effective for us beginning January 1, 2016. Early adoption is permitted. We currently do not anticipate the adoption of this standard will have a material impact on our condensed consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. It requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. Thus, it depicts the transfer of promised goods or services to customers in an amount that reflects the consideration an entity expects to receive in exchange for those goods or services. Companies have the option of applying the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application. Early adoption is not permitted. The new guidance is effective for us beginning January 1, 2017. We are currently evaluating the method and impact that adopting this new accounting standard will have on our condensed consolidated financial statements.
 
Note 2. Restatement
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we restated our consolidated financial statements for the years ended December 31, 2013 and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time (“Forward Loss Adjustments”); and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011 (“Tax Adjustments”). The misconduct and its related financial impact were concealed from our senior management, internal auditors, and external auditors.
Also as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Forward Loss Adjustments were based on certain assumptions and estimates. To determine the loss on the Contract, we estimated the number of units we would have expected to ship over the life of the Contract at inception of the Contract using external market industry data for fiscal years 2009, 2010, 2011, 2012, and 2013. We used data obtained directly from the customer for 2014 and 2015. The total estimated costs at any given point in time would typically include actual historical costs up to that time plus the estimated cost to produce units to be delivered. In addition, the estimated total cost for the life of the Contract includes certain inefficiencies on labor, material, and overhead costs during the initial start-up period. However, as we progress along the learning curve, the direct labor hours and overhead rates are expected to decrease as we gain technical knowhow and efficiency in producing the product. As a result of the misconduct by the employees in the recording of direct labor hours to the Contract, the historical actual direct labor hours charged to the Contract were inaccurate. As a result, we estimated the costs to complete future units at the end of each period based on an estimate of the direct labor hours chargeable to the Contract, including consideration of anticipated learning curve efficiencies that would decrease the direct labor hours over the remaining term of the Contract. Further, we used the actual direct labor hours incurred by the employees assigned to the Contract as a basis for projecting future

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hours, less an estimate of the time not allocable to the Contract. Using this model, we calculated the Forward Loss Adjustments from the inception of the Contract in 2009 through the expected life of the Contract. As a result of the Forward Loss Adjustments, cost of goods sold increased (decreased) approximately $6.7 million in 2009, $1.3 million in 2010, $(0.3) million in 2011, $(2.2) million in 2012, $(0.9) million in 2013, and $(0.8) million in the nine months ended September 27, 2014.
Further, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Tax Adjustments were necessary as a result of certain calculation errors. The Tax Adjustments resulted in a net decrease to income tax expense of approximately $0.9 million in 2013 and zero in 2012. The Tax Adjustments in 2011 resulted in a reduction to the carrying value of goodwill totaling approximately $4.0 million due to a calculation error in the original purchase price allocation and subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred income taxes and thus, (i) reduced deferred income taxes by approximately $2.7 million and (ii) generated a pre-tax goodwill impairment charge of approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by approximately $1.6 million that were established as a result of shared-based compensation expenses recorded previously and should have been reduced as the tax deductions were utilized. Moreover, the restated amounts include previously identified and disclosed immaterial adjustments.
In evaluating whether our previously issued consolidated financial statements were materially misstated, we evaluated the cumulative impact of these items on prior periods in accordance with the guidance in ASC 250-10, “Accounting Changes and Error Corrections,” relating to SEC Staff Accounting Bulletin No. 99, “Materiality” (“SAB 99”), and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), and we concluded these errors were in the aggregate material to the prior reporting periods, and therefore, restatement of previously filed financial statements was necessary to our previously issued 2013, 2012, 2011, and 2010 financial statements.
This Quarterly Report on Form 10-Q for the quarter ended April 4, 2015 includes the impact of the restatement on the comparative unaudited quarterly financial information for the quarter ended March 29, 2014. In addition, our future Quarterly Reports on Form 10-Q for subsequent quarterly periods during 2015 will reflect the impact of the restatement in the 2014 comparative prior quarter and year-to-date periods. Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
The account balances labeled “As Reported” in the following tables for the quarter ended March 29, 2014 represent the previously reported unaudited balances in our Quarterly Report on Form 10-Q for the quarter ended March 29, 2014. The effects of these prior period errors on our unaudited condensed consolidated financial statements are as follows (in thousands, except per share data):

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March 29, 2014
Unaudited Condensed Consolidated Balance Sheet:
 
As Reported
 
Adjustments
 
As Restated
Assets
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
29,415

 
$

 
$
29,415

Accounts receivable (less allowance for doubtful accounts of $427 at March 29, 2014)
 
100,570

 

 
100,570

Inventories
 
148,895

 

 
148,895

Production cost of contracts
 
10,479

 

 
10,479

Deferred income taxes
 
13,836

 
1,504

 
15,340

Other current assets
 
21,664

 
998

 
22,662

Total Current Assets
 
324,859

 
2,502

 
327,361

Property and Equipment, Net
 
94,168

 

 
94,168

Goodwill
 
161,940

 
(4,371
)
 
157,569

Intangibles, Net
 
162,875

 

 
162,875

Other Assets
 
9,320

 

 
9,320

Total Assets
 
$
753,162

 
$
(1,869
)
 
$
751,293

Liabilities and Shareholders’ Equity
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
Current portion of long-term debt
 
$
25

 
$

 
$
25

Accounts payable
 
53,973

 

 
53,973

Accrued liabilities
 
39,628

 
3,824

 
43,452

Total Current Liabilities
 
93,626

 
3,824

 
97,450

Long-Term Debt, Less Current Portion
 
325,171

 

 
325,171

Deferred Income Taxes
 
70,556

 
(500
)
 
70,056

Other Long-Term Liabilities
 
18,922

 
(300
)
 
18,622

Total Liabilities
 
508,275

 
3,024

 
511,299

Commitments and Contingencies
 

 

 

Shareholders’ Equity
 
 
 
 
 
 
Common stock - $0.01 par value; 35,000,000 shares authorized; 10,999,632 shares issued at March 29, 2014
 
110

 

 
110

Treasury stock, at cost; 143,300 shares at March 29, 2014
 
(1,924
)
 

 
(1,924
)
Additional paid-in capital
 
71,037

 
(1,633
)
 
69,404

Retained earnings
 
179,457

 
(3,260
)
 
176,197

Accumulated other comprehensive loss
 
(3,793
)
 

 
(3,793
)
Total Shareholders’ Equity
 
244,887

 
(4,893
)
 
239,994

Total Liabilities and Shareholders’ Equity
 
$
753,162

 
$
(1,869
)
 
$
751,293



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Three Months Ended March 29, 2014
Unaudited Condensed Consolidated Statement of Income:
 
As Reported
 
Adjustments
 
As Restated
Net Revenues
 
$
179,753

 
$

 
$
179,753

Cost of Sales
 
144,683

 
(845
)
 
143,838

Gross Profit
 
35,070

 
845

 
35,915

Selling, General and Administrative Expenses
 
21,087

 

 
21,087

Operating Income
 
13,983

 
845

 
14,828

Interest Expense
 
(7,125
)
 

 
(7,125
)
Income Before Taxes
 
6,858

 
845

 
7,703

Income Tax Expense
 
2,229

 
315

 
2,544

Net Income
 
$
4,629

 
$
530

 
$
5,159

Earnings Per Share
 
 
 
 
 
 
Basic earnings per share
 
$
0.43

 
$
0.05

 
$
0.48

Diluted earnings per share
 
$
0.42

 
$
0.05

 
$
0.46

Weighted-Average Number of Shares Outstanding
 
 
 
 
 
 
Basic
 
10,844

 

 
10,844

Diluted
 
11,107

 

 
11,107


 
 
Three Months Ended March 29, 2014
Unaudited Condensed Consolidated Statement of Comprehensive Income:
 
As Reported
 
Adjustments
 
As Restated
Net Income
 
$
4,629

 
$
530

 
$
5,159

Pension Adjustments
 
 
 
 
 
 
Amortization of actuarial loss included in net income, net of tax benefit of $36 for the three months ended March 29, 2014
 
(69
)
 

 
(69
)
Other Comprehensive Loss
 
(69
)
 

 
(69
)
Comprehensive Income
 
$
4,560

 
$
530

 
$
5,090



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Three Months Ended March 29, 2014
Unaudited Condensed Consolidated Cash Flow Statement:
 
As Reported
 
Adjustments
 
As Restated
Cash Flows from Operating Activities
 
 
 
 
 
 
Net Income
 
$
4,629

 
$
530

 
$
5,159

Adjustments to Reconcile Net Income to
 
 
 
 
 
 
Net Cash Provided by Operating Activities:
 
 
 
 
 
 
Depreciation and amortization
 
7,426

 

 
7,426

Stock-based compensation expense
 
364

 

 
364

Deferred income taxes
 
(919
)
 
315

 
(604
)
Excess tax benefits from stock-based compensation
 
(124
)
 

 
(124
)
Recovery of doubtful accounts
 
(62
)
 

 
(62
)
Other
 
88

 
(845
)
 
(757
)
Changes in Assets and Liabilities:
 
 
 
 
 
 
Accounts receivable
 
(8,599
)
 

 
(8,599
)
Inventories
 
(8,388
)
 

 
(8,388
)
Production cost of contracts
 
513

 

 
513

Other assets
 
5,440

 

 
5,440

Accounts payable
 
(4,138
)
 

 
(4,138
)
Accrued and other liabilities
 
(6,067
)
 

 
(6,067
)
Net Cash Used in Operating Activities
 
(9,837
)
 

 
(9,837
)
Cash Flows from Investing Activities
 
 
 
 
 
 
Purchases of property and equipment
 
(2,192
)
 

 
(2,192
)
Proceeds from sales of assets
 
5

 

 
5

Net Cash Used in Investing Activities
 
(2,187
)
 

 
(2,187
)
Cash Flows from Financing Activities
 
 
 
 
 
 
Repayment of term loan and other debt
 
(7,506
)
 

 
(7,506
)
Excess tax benefits from stock-based compensation
 
124

 

 
124

Net proceeds from issuance of common stock under stock plans
 
7

 

 
7

Net Cash Used in Financing Activities
 
(7,375
)
 

 
(7,375
)
Net Decrease in Cash and Cash Equivalents
 
(19,399
)
 

 
(19,399
)
Cash and Cash Equivalents at Beginning of Year
 
48,814

 

 
48,814

Cash and Cash Equivalents at End of Year
 
$
29,415

 
$

 
$
29,415

Supplemental Disclosures of Cash Flow Information
 
 
 
 
 
 
Interest paid
 
$
11,397

 
$

 
$
11,397

Taxes paid
 
$
58

 
$

 
$
58

Non-cash activities:
 
 
 
 
 
 
     Purchases of property and equipment not paid
 
$
182

 
$

 
$
182


Note 3. Inventories
Inventories consisted of the following:
 
 
(In thousands)
 
 
April 4,
2015
 
December 31,
2014
Raw materials and supplies
 
$
80,190

 
$
77,033

Work in process
 
60,655

 
61,458

Finished goods
 
10,455

 
14,116

 
 
151,300

 
152,607

Less progress payments
 
9,857

 
9,765

Total
 
$
141,443

 
$
142,842



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 We net advances from customers related to inventory purchases against inventories in the consolidated balance sheets.


Note 4. Goodwill
The carrying amounts of goodwill, by operating segment, were as follows:
 
 
(In thousands)
 
 
Ducommun
AeroStructures
 
Ducommun
LaBarge
Technologies
 
Consolidated
Ducommun
Gross goodwill
 
$
57,243

 
$
182,048

 
$
239,291

Accumulated goodwill impairment
 

 
(81,722
)
 
(81,722
)
Balance at December 31, 2014
 
$
57,243

 
$
100,326

 
$
157,569

Balance at April 4, 2015
 
$
57,243

 
$
100,326

 
$
157,569

 
Note 5. Accrued Liabilities
The components of accrued liabilities were as follows:
 
 
(In thousands)
 
 
April 4,
2015
 
December 31,
2014
Accrued compensation
 
$
22,274

 
$
25,352

Accrued income and sales tax
 
1,498

 
1,580

Customer deposits
 
1,171

 
1,139

Interest payable
 
4,111

 
9,439

Provision for forward loss reserves
 
4,776

 
4,734

Other
 
7,829

 
9,822

Total
 
$
41,659

 
$
52,066


Note 6. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
 
 
(In thousands)
 
 
April 4,
2015
 
December 31,
2014
Senior unsecured notes (fixed 9.75%)
 
$
200,000

 
$
200,000

Senior secured term loan (floating 4.75%)
 
80,000

 
90,000

Other debt (fixed 5.41%)
 
46

 
52

Total debt
 
280,046

 
290,052

Less current portion
 
27

 
26

Total long-term debt
 
$
280,019

 
$
290,026

Weighted-average interest rate
 
8.32
%
 
8.20
%

We made voluntary principal prepayments on our senior secured term loan of approximately $10.0 million and $7.5 million for the three months ended April 4, 2015 and March 29, 2014, respectively.
As of April 4, 2015, we had approximately $58.5 million of unused borrowing capacity under the revolving credit facility, after deducting approximately $1.5 million for standby letters of credit.
The failure to file our 2014 Annual Report on Form 10-K by March 31, 2015 resulted in defaults, but not an event of default, under our senior secured term loan and senior secured revolving credit facility (together, the “Credit Facilities”) and our senior

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unsecured notes (the “Notes”). The defaults on our Credit Facilities and our Notes were deemed cured with the filing of our Annual Report on Form 10-K on April 9, 2015. Thus, as of April 4, 2015, we were not in compliance with all covenants required by our amended credit agreement. However, as of April 4, 2015, there were no amounts outstanding that would have triggered the leverage covenant under the Amended Credit Agreement. Under the terms of the credit agreement, if, during a given fiscal quarter, (i) the sum of (a) any amounts outstanding under the revolving credit facility plus (b) the amount drawn under any letters of credit exceeds $1.0 million or (ii) the aggregate amount of outstanding letters of credit exceeds $5.0 million, the revolving credit facility will be subject to a maximum total leverage ratio.
The carrying amount of our long-term debt approximated fair value, except for the senior unsecured notes for which the fair value was approximately $211.5 million. Fair value was estimated using Level 2 inputs, based on the terms of the related debt, recent transactions and estimates using interest rates currently available to us for debt with similar terms and remaining maturities.
The Notes were issued by us (“Parent Company”) and guaranteed by all of our subsidiaries, other than one subsidiary (“Subsidiary Guarantors”) that was considered minor. The Parent Company has no independent assets or operations and the Subsidiary Guarantors jointly and severally guarantee, on a senior unsecured basis, the Notes. Therefore, no condensed consolidating financial information for the Parent Company and its subsidiaries are presented.

Note 7. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At April 4, 2015 and December 31, 2014, no preferred shares were issued or outstanding.
 
Note 8. Employee Benefit Plans
The components of net periodic pension expense were as follows:
 
 
(In thousands)
 
 
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
Service cost
 
$
196

 
$
173

Interest cost
 
338

 
319

Expected return on plan assets
 
(374
)
 
(350
)
Amortization of actuarial losses
 
222

 
105

Net periodic pension cost
 
$
382

 
$
247

The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for the three months ended April 4, 2015 were as follows:
 
 
(In thousands)
 
 
Three Months Ended
 
 
April 4,
2015
Amortization of actuarial losses - total before tax (1)
 
$
(222
)
Tax benefit
 
97

Net of tax
 
$
(125
)

(1)
The amortization expense is included in the computation of periodic pension cost and is a decrease to net income upon reclassification from accumulated other comprehensive loss.

Note 9. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with

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certain facility leases, we have indemnified our lessors for certain claims arising from the facility or the lease. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware.
However, we have a directors and officers insurance policy that may reduce our exposure in certain circumstances and may enable us to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. We estimate the fair value of our indemnification obligations as insignificant based on this history and insurance coverage and have, therefore, not recorded any liability for these guarantees and indemnities in the accompanying condensed consolidated balance sheets.
 
Note 10. Income Taxes
We recorded an income tax benefit of approximately $1.1 million (effective tax benefit rate of 35%) for the three months ended April 4, 2015 compared to an income tax expense of approximately $2.5 million (effective tax rate of 33%) for the three months ended March 29, 2014. The effective tax benefit rate for the three months ended April 4, 2015 includes a benefit for the Qualified Domestic Production Activities Deduction that was partially offset by permanent tax difference items and state taxes. The effective tax rate for the three months ended March 29, 2014 included a benefit for the Qualified Domestic Production Activities Deduction.
Our unrecognized tax benefits were approximately $2.8 million both as of April 4, 2015 and December 31, 2014. Approximately $1.9 million, if recognized, would affect the annual income tax rate. We do not reasonably expect significant increases or decreases to our unrecognized tax benefits in the next twelve months.

Note 11. Contingencies
On October 8, 2014, the United States District Court for the District of Kansas (the “District Court”) granted summary judgment in favor of The Boeing Company (“Boeing”) and Ducommun and dismissed the lawsuit entitled United States of America ex rel Taylor Smith, Jeannine Prewitt and James Ailes v. The Boeing Company and Ducommun Inc.. The lawsuit was a qui tam action brought by three former Boeing employees (“Relators”) against Boeing and Ducommun on behalf of the United States of America for violations of the United States False Claims Act. Relators have appealed the dismissal to the Tenth Circuit Court of Appeals. The lawsuit alleged that Ducommun sold unapproved parts to Boeing which were installed by Boeing in aircraft ultimately sold to the United States Government and that Boeing and Ducommun submitted or caused to be submitted false claims for payment relating to 21 aircraft sold by Boeing to the United States Government. The lawsuit sought damages in an amount equal to three times the amount of damages the United States Government sustained because of the defendants’ actions, plus a civil penalty of $10 thousand for each false claim made on or before September 28, 1999, and $11 thousand for each false claim made on or after September 28, 1999, together with attorneys’ fees and costs. The Relators claimed that the United States Government sustained damages of $1.6 billion (the contract purchase price of 21 aircraft) or, alternatively, $851 million (the alleged diminished value and increased maintenance cost of the 21 aircraft). After investigating the allegations, the United States Government declined to intervene in the lawsuit.
DAS has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, Ducommun has established a reserve for its estimated liability for such investigation and corrective action of approximately $1.5 million at April 4, 2015, which is reflected in other long-term liabilities on its consolidated balance sheet.
DAS also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. DAS and other companies and government entities have entered into consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based on currently available information, Ducommun preliminarily estimates that the range of its future liabilities in connection with the landfill located in West Covina, California is between approximately $0.4 million and $3.1 million. Ducommun has established a reserve for its estimated liability, in connection with the West Covina landfill of approximately $0.4 million at April 4, 2015, which is reflected in other long-term liabilities on its consolidated balance sheet. Ducommun’s ultimate liability in connection with these matters will depend upon a number of factors, including changes in existing laws and regulations, the design and cost of construction, operation and maintenance activities, and the allocation of liability among potentially responsible parties.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and inquiries, including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs contingent liabilities. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect that any sum it

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may be required to pay in connection with these matters would have a material adverse effect on its condensed consolidated financial position, results of operations or cash flows.

 
Note 12. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two strategic businesses, DAS and DLT, each of which is a reportable operating segment.

Financial information by reportable operating segment was as follows:
 
 
(In thousands)
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
 
 
 
 
As Restated
Net Revenues
 
 
 
 
DAS
 
$
72,058

 
$
81,654

DLT
 
100,862

 
98,099

Total Net Revenues
 
$
172,920

 
$
179,753

Segment Operating Income
 
 
 
 
DAS
 
$
2,138

 
$
11,092

DLT
 
6,285

 
7,044

 
 
8,423

 
18,136

Corporate General and Administrative Expenses (1)
 
(4,796
)
 
(3,308
)
Operating Income
 
$
3,627

 
$
14,828

Depreciation and Amortization Expenses
 
 
 
 
DAS
 
$
2,513

 
$
2,416

DLT
 
4,359

 
5,008

Corporate Administration
 
42

 
2

Total Depreciation and Amortization Expenses
 
$
6,914

 
$
7,426

Capital Expenditures
 
 
 
 
DAS
 
$
3,334

 
$
1,285

DLT
 
1,490

 
897

Corporate Administration
 
4

 
10

Total Capital Expenditures
 
$
4,828

 
$
2,192


(1)
Includes costs not allocated to either the DLT or DAS operating segments.
Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash. Our segment assets are as follows:
 
 
(In thousands)
 
 
April 4,
2015
 
December 31,
2014
Total Assets
 
 
 
 
DAS
 
$
246,066

 
$
245,925

DLT
 
418,654

 
427,719

Corporate Administration
 
61,207

 
73,955

Total Assets
 
$
725,927

 
$
747,599

Goodwill and Intangibles
 
 
 
 
DAS
 
$
57,243

 
$
57,243

DLT
 
100,326

 
100,326

Total Goodwill and Intangibles
 
$
157,569

 
$
157,569


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Restatement of Previously Issued Financial Statements
As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, we restated our consolidated financial statements for the years ended December 31, 2013 and 2012 and our unaudited quarterly financial information for the first three quarters in the year ended December 31, 2014 and for each of the quarters in the year ended December 31, 2013, to correct errors in prior periods primarily related to (i) a long-term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time (“Forward Loss Adjustments”); and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011 (“Tax Adjustments”). The misconduct and its related financial impact were concealed from our senior management, internal auditors, and external auditors.
Also as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Forward Loss Adjustments were based on certain assumptions and estimates. To determine the loss on the Contract, we estimated the number of units we would have expected to ship over the life of the Contract at inception of the Contract using external market industry data for fiscal years 2009, 2010, 2011, 2012, and 2013. We used data obtained directly from the customer for 2014 and 2015. The total estimated costs at any given point in time would typically include actual historical costs up to that time plus the estimated cost to produce units to be delivered. In addition, the estimated total cost for the life of the Contract includes certain inefficiencies on labor, material, and overhead costs during the initial start-up period. However, as we progress along the learning curve, the direct labor hours and overhead rates are expected to decrease as we gain technical knowhow and efficiency in producing the product. As a result of the misconduct by the employees in the recording of direct labor hours to the Contract, the historical actual direct labor hours charged to the Contract were inaccurate. As a result, we estimated the costs to complete future units at the end of each period based on an estimate of the direct labor hours chargeable to the Contract, including consideration of anticipated learning curve efficiencies that would decrease the direct labor hours over the remaining term of the Contract. Further, we used the actual direct labor hours incurred by the employees assigned to the Contract as a basis for projecting future hours, less an estimate of the time not allocable to the Contract. Using this model, we calculated the Forward Loss Adjustments from the inception of the Contract in 2009 through the expected life of the Contract. As a result of the Forward Loss Adjustments, cost of goods sold increased (decreased) approximately $6.7 million in 2009, $1.3 million in 2010, $(0.3) million in 2011, $(2.2) million in 2012, $(0.9) million in 2013, and $(0.8) million in the nine months ended September 27, 2014.
Further, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Tax Adjustments were necessary as a result of certain calculation errors. The Tax Adjustments resulted in a net decrease to income tax expense of approximately $0.9 million in 2013 and zero in 2012. The Tax Adjustments in 2011 resulted in a reduction to the carrying value of goodwill totaling approximately $4.0 million due to a calculation error in the original purchase price allocation and subsequent performance of step 2 of our annual goodwill impairment analysis related to deferred income taxes and thus, (i) reduced deferred income taxes by approximately $2.7 million and (ii) generated a pre-tax goodwill impairment charge of approximately $1.4 million. Further, the Tax Adjustments in 2011 reduced deferred tax assets by approximately $1.6 million that were established as a result of shared-based compensation expenses recorded previously and should have been reduced as the tax deductions were utilized. Moreover, the restated amounts include previously identified and disclosed immaterial adjustments.
See Part I, Item 4 of this Form 10-Q for information regarding our controls and procedures.
Overview
Ducommun Incorporated (“Ducommun,” the “Company,” “we,” “us” or “our”) is a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace, defense, industrial, natural resources, medical and other industries. Ducommun differentiates itself as a full-service solution-based provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures and integrated solutions. We operate through two primary business units: Ducommun LaBarge Technologies (“DLT”) and Ducommun AeroStructures (“DAS”).
First quarter 2015 recap:
First quarter revenue was approximately $172.9 million

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Net loss of approximately $2.0 million, or $0.18 per share
EBITDA for the quarter was approximately $10.5 million
Made voluntary principal prepayment of $10.0 million on term loan during the quarter
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) was approximately $10.5 million and $22.3 million for the three months ended April 4, 2015 and March 29, 2014, respectively. See “Non-GAAP Financial Measures” below for certain information regarding EBITDA, including reconciliation of EBITDA to net income.
Non-GAAP Financial Measures
When viewed with our financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and accompanying reconciliations, we believe EBITDA provides additional useful information to clarify and enhance the understanding of the factors and trends affecting our past performance and future prospects. We define these measures, explain how they are calculated and provide reconciliations of these measures to the most comparable GAAP measure in the tables below. EBITDA and the related financial ratios, as presented in this Form 10-Q, are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not a measurement of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to net cash provided by operating activities as measures of our liquidity. The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items.
We use EBITDA as a non-GAAP operating performance measure internally as complementary financial measures to evaluate the performance and trends of our businesses. We present EBITDA and the related financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our ability to meet our future debt service, capital expenditures, working capital requirements and overall operating performance.
EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
They do not reflect changes in, or cash requirements for, our working capital needs;
They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements;
They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and
Other companies in our industry may calculate EBITDA differently from us, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using EBITDA as only supplemental information. See our condensed consolidated financial statements contained in this Form 10-Q report.
However, in spite of the above limitations, we believe that EBITDA is useful to an investor in evaluating our results of operations because these measures:
Are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;

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Help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and
Are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.
The following financial items have been added back to our net (loss) income when calculating EBITDA:
Amortization expense may be useful to investors because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights;
Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations;
Interest expense may be useful to investors for determining current cash flow; and
Income tax expense may be useful to investors because it represents the taxes which may be payable for the period and the change in deferred taxes during the period, and may reduce cash flow available for use in our business.
Reconciliations of net (loss) income to EBITDA and the presentation of EBITDA as a percentage of net revenues were as follows:
 
 
(In thousands)
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
 
 
 
 
As Restated
Net (loss) income
 
$
(1,973
)
 
$
5,159

Depreciation and amortization
 
6,914

 
7,426

Interest expense
 
6,661

 
7,125

Income tax (benefit) expense
 
(1,061
)
 
2,544

EBITDA
 
$
10,541

 
$
22,254

% of net revenues
 
6.1
%
 
12.4
%
 
EBITDA decreased in the three months ended April 4, 2015 compared to the three months ended March 29, 2014, primarily due to decreases in net income, depreciation and amortization expense, and interest expense, partially offset by lower income tax expense.



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Table of Contents

Results of Operations
First Quarter of 2015 Compared to First Quarter of 2014
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:

 
 
(in thousands, except per share data)
Three Months Ended
 
 
April 4,
2015
 
%
of Net  Revenues
 
March 29,
2014
 
%
of Net  Revenues
 
 
 
 
 
 
As Restated
 
As Restated
Net Revenues
 
$
172,920

 
100.0
 %
 
$
179,753

 
100.0
 %
Cost of Sales
 
146,159

 
84.5
 %
 
143,838

 
80.0
 %
Gross Profit
 
26,761

 
15.5
 %
 
35,915

 
20.0
 %
Selling, General and Administrative Expenses
 
23,134

 
13.4
 %
 
21,087

 
11.7
 %
Operating Income
 
3,627

 
2.1
 %
 
14,828

 
8.2
 %
Interest Expense
 
(6,661
)
 
(3.9
)%
 
(7,125
)
 
(4.0
)%
(Loss) Income Before Taxes
 
(3,034
)
 
(1.8
)%
 
7,703

 
4.3
 %
Income Tax (Benefit) Expense
 
(1,061
)
 
nm

 
2,544

 
nm

Net (Loss) Income
 
$
(1,973
)
 
(1.1
)%
 
$
5,159

 
2.9
 %
 
 
 
 
 
 
 
 
 
Effective Tax (Benefit) Rate
 
(35.0
)%
 
nm

 
33.0
%
 
nm

Diluted (Loss) Earnings Per Share
 
$
(0.18
)
 
nm

 
$
0.46

 
nm

nm = not meaningful
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during the first fiscal three months of 2015 and 2014, respectively, were as follows:

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Three Months Ended
 
 
 
 
(In thousands)
 
% of Net Revenues
 
 
Change
 
April 4
2015
 
March 29,
2014
 
April 4
2015
 
March 29,
2014
Consolidated Ducommun
 
 
 
 
 
 
 
 
 
 
Military and space
 
 
 
 
 
 
 
 
 
 
Defense technologies
 
$
(5,728
)
 
$
51,523

 
$
57,251

 
30%
 
32%
Defense structures
 
(14,711
)
 
19,485

 
34,196

 
11%
 
19%
Commercial aerospace
 
11,129

 
67,570

 
56,441

 
39%
 
31%
Natural resources
 
541

 
11,316

 
10,775

 
7%
 
6%
Industrial
 
3,980

 
13,090

 
9,110

 
8%
 
5%
Medical and other
 
(2,044
)
 
9,936

 
11,980

 
6%
 
7%
Total
 
$
(6,833
)
 
$
172,920

 
$
179,753

 
100%
 
100%
 
 
 
 
 
 
 
 
 
 
 
DAS
 
 
 
 
 
 
 
 
 
 
Military and space (defense structures)
 
$
(14,711
)
 
$
19,485

 
$
34,196

 
27%
 
42%
Commercial aerospace
 
5,115

 
52,573

 
47,458

 
73%
 
58%
Total
 
$
(9,596
)
 
$
72,058

 
$
81,654

 
100%
 
100%
 
 
 
 
 
 
 
 
 
 
 
DLT
 
 
 
 
 
 
 
 
 
 
Military and space (defense technologies)
 
$
(5,728
)
 
$
51,523

 
$
57,251

 
51%
 
59%
Commercial aerospace
 
6,014

 
14,997

 
8,983

 
15%
 
9%
Natural resources
 
541

 
11,316

 
10,775

 
11%
 
11%
Industrial
 
3,980

 
13,090

 
9,110

 
13%
 
9%
Medical and other
 
(2,044
)
 
9,936

 
11,980

 
10%
 
12%
Total
 
$
2,763

 
$
100,862

 
$
98,099

 
100%
 
100%
Net revenues for the three months ended April 4, 2015 were approximately $172.9 million, compared to approximately $179.8 million for the three months ended March 29, 2014. The net revenues decrease year-over-year primarily reflects an approximate 22% decrease in revenue in the military and space end-use markets, partially offset by an approximate 20% increase in revenue in the commercial aerospace end-use markets and an approximate 8% increase in revenue in the non-aerospace and defense end-use markets.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
 
 
Three Months Ended
 
 
April 4,
2015
 
March 29,
2014
Boeing Company
 
15
%
 
21
%
Raytheon Company
 
7
%
 
8
%
Total top ten customers
 
53
%
 
58
%


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Table of Contents

The Boeing Company (“Boeing”) and Raytheon Company (“Raytheon”) represented the following percentages of total accounts receivable:
 
 
April 4,
2015
 
December 31,
2014
Boeing
 
13
%
 
16
%
Raytheon
 
7
%
 
7
%
The net revenues and accounts receivable from Boeing and Raytheon are diversified over a number of commercial, military and space programs and were made by both operating segments.
Gross Profit
Gross profit margin decreased year-over-year in the three months ended April 4, 2015 compared to the three months ended March 29, 2014 primarily due to an unfavorable product mix, lower revenues, and loss of efficiencies resulting from lower manufacturing volume.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses increased year-over-year in the three months ended April 4, 2015 compared to the three months ended March 29, 2014 primarily due to higher accrued compensation and benefit costs and higher professional service fees.
Interest Expense
Interest expense decreased year over year in the three months ended April 4, 2015 compared to the three months ended March 29, 2014 primarily due to lower outstanding debt balances as a result of voluntary principal prepayments of our term loan each quarter during 2014 as well as the first quarter of 2015 as we continue to de-lever our balance sheet.
Income Tax (Benefit) Expense
We recorded an income tax benefit of approximately $1.1 million (effective tax benefit rate of 35%) for the three months ended April 4, 2015 compared to an income tax expense of approximately $2.5 million (effective tax rate of 33%) for the three months ended March 29, 2014. The effective tax benefit rate for the three months ended April 4, 2015 includes a benefit for the Qualified Domestic Production Activities Deduction that was partially offset by permanent tax difference items and state taxes. The effective tax rate for the three months ended March 29, 2014 included a benefit for the Qualified Domestic Production Activities Deduction.
Net (Loss) Income and (Loss) Earnings per Diluted Share
Net (loss) income and (loss) earnings per diluted share for the three months ended April 4, 2015 were approximately $(2.0) million, or $(0.18) per share, compared to approximately $5.2 million, or $0.46 per diluted share, for the three months ended March 29, 2014. Net loss for the three months ended April 4, 2015 compared to net income for the three months ended March 29, 2014 was primarily due to an unfavorable product mix, lower revenues, loss of efficiencies resulting from lower manufacturing volume, higher accrued compensation and benefit costs, and higher professional service fees, partially offset by lower income tax expense and lower interest expense.


24

Table of Contents

Business Segment Performance
We report our financial performance based upon the two reportable operating segments: DAS and DLT. The results of operations differ between our reportable operating segments due to differences in competitors, customers, extent of proprietary deliverables and performance. The following table summarizes our business segment performance for the three months ended April 4, 2015 and March 29, 2014:
 
 
Three Months Ended
 
 
%
 
(In thousands)
 
% of Net Revenues
 
 
Change
 
April 4,
2015
 
March 29,
2014
 
April 4,
2015
 
March 29,
2014
 
 
 
 
 
 
As Restated
 
 
 
As Restated
Net Revenues
 
 
 
 
 
 
 
 
 
 
DAS
 
(11.8
)%
 
$
72,058

 
$
81,654

 
41.7
 %
 
45.4
 %
DLT
 
2.8
 %
 
100,862

 
98,099

 
58.3
 %
 
54.6
 %
Total Net Revenues
 
(3.8
)%
 
$
172,920

 
$
179,753

 
100.0
 %
 
100.0
 %
Segment Operating Income
 
 
 
 
 
 
 
 
 
 
DAS
 
 
 
$
2,138

 
$
11,092

 
3.0
 %
 
13.6
 %
DLT
 
 
 
6,285

 
7,044

 
6.2
 %
 
7.2
 %
 
 
 
 
8,423

 
18,136

 
 
 
 
Corporate General and Administrative Expenses (1)
 
 
 
(4,796
)
 
(3,308
)
 
(2.8
)%
 
(1.8
)%
Total Operating Income
 
 
 
$
3,627

 
$
14,828

 
2.1
 %
 
8.2
 %
EBITDA
 
 
 
 
 
 
 
 
 
 
DAS
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 
$
2,138

 
$
11,092

 
 
 
 
Depreciation and Amortization
 
 
 
2,513

 
2,416

 
 
 
 
 
 
 
 
4,651

 
13,508

 
6.5
 %
 
16.5
 %
DLT
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 
6,285

 
7,044

 
 
 
 
Depreciation and Amortization
 
 
 
4,359

 
5,008

 
 
 
 
 
 
 
 
10,644

 
12,052

 
10.6
 %
 
12.3
 %
Corporate General and Administrative Expenses (1)
 
 
 
 
 
 
 
 
 
 
Operating Loss
 
 
 
(4,796
)
 
(3,308
)
 
 
 
 
Depreciation and Amortization
 
 
 
42

 
2

 
 
 
 
 
 
 
 
(4,754
)
 
(3,306
)
 
 
 
 
EBITDA
 
 
 
$
10,541

 
$
22,254

 
6.1
 %
 
12.4
 %

(1)
Includes costs not allocated to either the DLT or DAS operating segments.
Ducommun AeroStructures
DAS’s net revenues in the three months ended April 4, 2015 compared to the three months ended March 29, 2014 decreased approximately 12% primarily due to an approximate 43% decrease in military and space revenue that was partially offset by approximate 11% increase in commercial aerospace revenue.
The DAS segment operating income decreased in the three month period ending April 4, 2015 primarily due to an unfavorable product mix, lower revenues, and loss of efficiencies resulting from lower manufacturing volume. EBITDA was approximately $4.7 million for the current quarter, or 7% of revenue, compared to approximately $13.5 million, or 17% of revenue, for the comparable quarter in the prior year.
Ducommun LaBarge Technologies
DLT’s net revenues in the three months ended April 4, 2015 compared to the three months ended March 29, 2014 increased approximately 3% primarily due to an approximate 67% increase in commercial aerospace revenue and an approximate 8% increase in non-A&D revenue, partially offset by an approximate 10% decrease in military and space revenue.

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Table of Contents

DLT’s segment operating income decreased in the three month period ending April 4, 2015 compared to the three months ended March 29, 2014 primarily due to an unfavorable product mix that was partially offset by higher revenues.
Corporate General and Administrative (“CG&A”)
CG&A expenses increased approximately $1.5 million in the three months ending April 4, 2015 compared to the three months ended March 29, 2014 primarily due to higher accrued compensation and benefit costs and higher professional service fees.
Backlog
Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent than our net revenues. Backlog in non-aerospace and defense markets tends to be of a shorter duration and is generally fulfilled within a 3-month period. As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net revenues. Approximately $431 million of total backlog is expected to be delivered over the next 12 months. The following table summarizes our backlog as of April 4, 2015 and December 31, 2014:
 
 
(In thousands)
 
 
Change
 
April 4,
2015
 
December 31,
2014
Consolidated Ducommun
 
 
 
 
 
 
Military and space
 
 
 
 
 
 
Defense technologies
 
$
(6,174
)
 
$
178,843

 
$
185,017

Defense structures
 
(4,504
)
 
70,285

 
74,789

Commercial aerospace
 
(9,299
)
 
223,085

 
232,384

Natural resources
 
(6,952
)
 
15,560

 
22,512

Industrial
 
2,526

 
26,857

 
24,331

Medical and other
 
3,401

 
23,648

 
20,247

Total
 
$
(21,002
)
 
$
538,278

 
$
559,280

DAS
 
 
 
 
 
 
Military and space (defense structures)
 
$
(4,504
)
 
$
70,285

 
$
74,789

Commercial aerospace
 
(10,337
)
 
189,070

 
199,407

Total
 
$
(14,841
)
 
$
259,355

 
$
274,196

DLT
 
 
 
 
 
 
Military and space (defense technologies)
 
$
(6,174
)
 
$
178,843

 
$
185,017

Commercial aerospace
 
1,038

 
34,015

 
32,977

Natural resources
 
(6,952
)
 
15,560

 
22,512

Industrial
 
2,526

 
26,857

 
24,331

Medical and other
 
3,401

 
23,648

 
20,247

Total
 
$
(6,161
)
 
$
278,923

 
$
285,084


Liquidity and Capital Resources
Available Liquidity
Total debt, the weighted-average interest rate, cash and cash equivalents and available credit facilities were as follows:
 
 
(In millions)
 
 
April 4,
 
December 31,
 
 
2015
 
2014
Total debt, including long-term portion
 
$
280.0

 
$
290.1

Weighted-average interest rate on debt
 
8.32
%
 
8.20
%
Term Loan interest rate
 
4.75
%
 
4.75
%
Cash and cash equivalents
 
$
32.7

 
$
45.6

Unused Revolving Credit Facility
 
$
58.5

 
$
58.5


26

Table of Contents

We made voluntary principal prepayment of approximately $10.0 million during the three months ended April 4, 2015, on our term loan. We expect to refinance our debt during mid-2015, market conditions permitting, and after the refinancing, continue to pay down approximately $10.0 million per quarter.
The Revolving Credit Facility and Term Loan covenants require EBITDA of more than $50.0 million and a maximum leverage ratio under certain circumstances, as well as annual limitations on capital expenditures and limitations on future disposition of property, investments, acquisitions, repurchase of stock, dividends, and outside indebtedness.
The failure to file our 2014 Annual Report on Form 10-K by March 31, 2015 resulted in defaults, but not an event of default, under our senior secured term loan and senior secured revolving credit facility (together, the “Credit Facilities”) and our senior unsecured notes (the “Notes”). The defaults on our Credit Facilities and our Notes were deemed cured with the filing of our Annual Report on Form 10-K on April 9, 2015. Thus, as of April 4, 2015, we were not compliance with all covenants required by our amended credit agreement. However, as of April 4, 2015, there were no amounts outstanding that would have triggered the leverage covenant under the Amended Credit Agreement.
We expect to spend a total of approximately $15.0 million for capital expenditures in 2015 financed by cash generated from operations, principally to support new contract awards at DAS and DLT. As part of our strategic plan to become a Tier 2 supplier, additional up-front investment in tooling will be required for newer programs which have higher engineering content and higher levels of complexity in assemblies.
We continue to depend on operating cash flow and the availability of our Revolving Credit Facility to provide short-term liquidity. Cash generated from operations and bank borrowing capacity is expected to provide sufficient liquidity to meet our obligations during the next twelve months.

Cash Flow Summary
Net cash provided by operating activities for the three months ended April 4, 2015 increased to approximately $3.5 million, compared to net cash used of approximately $9.8 million in the three months ended March 29, 2014. The higher net cash generated during the first three months of 2015 was primarily due to improved working capital management that was partially offset by lower net income.
Net cash used in investing activities of approximately $5.6 million for the three months ended April 4, 2015 were primarily due to capital expenditures, principally to support new contract awards at DAS and DLT. The increase in net cash used compared to the prior year was primarily due to timing of capital expenditures.
Net cash used in financing activities for the three months ended April 4, 2015 of approximately $10.8 million were primarily due to voluntary principal prepayments on our term loan.

Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of operating leases and indemnities.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires estimation and judgment that affect the reported amounts of net revenues, expenses, assets and liabilities. For a description of our critical accounting policies, please refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2014 Annual Report on Form 10-K. There have been no material changes in any of our critical accounting policies during the three months ended April 4, 2015.
Recent Accounting Pronouncements
See “Part I, Item 1. Ducommun Incorporated and Subsidiaries—Notes to Condensed Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—Recent Accounting Pronouncements” for further information.


Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our main market risk exposure relates to changes in U.S. interest rates on our outstanding long-term debt. At April 4, 2015, we had borrowings of approximately $80.0 million under our Term Loan which bears interest, at our option, at a rate equal to either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three-, or six-month interest period chosen by us, plus

27

Table of Contents

an applicable margin percentage. This LIBOR rate has a floor of 1.00%, and a margin of 3.75%. A hypothetical 10% increase or decrease in the interest rate would have an immaterial impact on our financial condition and results of operations.
 
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”) have conducted an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of April 4, 2015. The Company had previously reported material weaknesses in internal control over financial reporting related to (i) a long-term contract (“Contract”) following the discovery of misconduct by employees in the recording of direct labor costs to the Contract from 2009 through the third quarter 2014 which resulted in the identification of a forward loss provision that should have been recorded in 2009 and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time (“Forward Loss Adjustments”); and (ii) the year end reconciliation of income taxes payable and deferred tax balances identified errors primarily in 2013, 2012, and 2011 (“Tax Adjustments”), which were described in Item 9A in the Management’s Report on Internal Control Over Financial Reporting in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. As a result of the material weaknesses in the Company’s internal control over financial reporting, which were not remediated as of April 4, 2015, the CEO and CFO concluded the Company’s disclosure controls and procedures were not effective as of April 4, 2015.
Remediation of Material Weaknesses
We continue to implement remediation steps to address the material weaknesses described above and to improve our internal control over (i) the recording of direct labor costs to the Contract which resulted in the identification of a forward loss provision that should have been recorded and the impact on subsequent periods of adjustments to the forward loss provision based on information available at the time, and (ii) reconciliation of income taxes payable and deferred tax balances.
Actions taken:
We have completed the implementation of additional on-going oversight, training and communication programs to reinforce our ethical standards and code of conduct across the Company.
Enhanced the availability of our hotline by more clearly defining its purpose.
We have redesigned our internal controls over the accounting for contract loss reserves, including an on-going review of the related labor distributions to estimate the anticipated costs used in the forward loss reserve analysis.
We have engaged third party tax advisors to assist with our methodology of estimating and reconciling tax entries.
Actions to be taken or in process:
We plan to augment our tax department with additional resources and professionals.
We plan to implement new controls and improve existing controls over income tax accounts, including controls over the reconciliation of current and deferred tax asset and liability accounts.
We have not completed all of the corrective processes, procedures and related evaluation or remediation that we believe are necessary. As we continue to evaluate and work to remediate the material weaknesses, we may determine to take additional measures to address the control deficiencies. We expect to complete the planned remedial actions during 2015, however, we cannot make any assurances that such actions will be completed during 2015. Until the remediation steps set forth above are fully implemented and concluded to be operating effectively (including the efforts to implement the necessary control activities we identified), the material weaknesses described above will continue to exist.
Changes in Internal Control over Financial Reporting
Except as otherwise discussed above under “Remediation of Material Weaknesses,” there were no other changes in our internal control over financial reporting during the three months ended April 4, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION

Item 1. Legal Proceedings

28

Table of Contents

See Note 11 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a description of our legal proceedings.

Item 1A. Risk Factors
See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of our risk factors. There have been no material changes in the three months ended April 4, 2015 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4. Mine Safety Disclosures
Not applicable.

29

Table of Contents

Item 6. Exhibits
2.1
Agreement and Plan of Merger, dated as of April 3, 2011, among Ducommun Incorporated, DLBMS, Inc. and LaBarge, Inc. Incorporated by reference to Exhibit 2.1 to Form 8-K filed on April 5, 2011.
3.1
Restated Certificate of Incorporation filed with the Delaware Secretary of State on May 29, 1990. Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
3.2
Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 27, 1998. Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended December 31, 1998.
3.3
Bylaws as amended and restated on March 19, 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated March 22, 2013.
3.4
Amendment No. 2 to Bylaws dated August 1, 2013. Incorporated by reference to Exhibit 99.2 to Form 8-K dated August 5, 2013.
4.1
Indenture, dated June 28, 2011, between Ducommun Incorporated, certain of its subsidiaries and Wilmington Trust FSB, as trustee. Incorporated by reference to Exhibit 4.1 to Form 8-K filed on July 1, 2011.
10.2
Credit Agreement, dated as of June 28, 2011, among Ducommun Incorporated, certain of its subsidiaries, UBS Securities LLC and Credit Suisse Securities (USA) LLC as joint lead arrangers, UBS AG, Stamford Branch as issuing bank, administrative agent and collateral agent, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on July 1, 2011.
10.3
Amendment No. 1 to Credit Agreement, dated as of March 28, 2013, by and among Ducommun Incorporated, certain of its subsidiaries, UBS AG, Stamford Branch as administrative agent, collateral agent, swingline bank and issuing bank and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K dated March 28, 2013.
10.4
Amendment No. 2 to Credit Agreement, dated as of October 18, 2013 by and among Ducommun Incorporated, certain of its subsidiaries, and UBS AG, Stamford Branch, as administrative agent, collateral agent, swingline bank and issuing bank, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K dated October 23, 2013.
* 10.5
2007 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a, filed on March 29, 2010.
*10.6
2013 Stock Incentive Plan. Incorporated by reference to Appendix B of Definitive Proxy Statement on Schedule 14a, filed on March 25, 2013.
*10.7
Form of Nonqualified Stock Option Agreement, for grants to employees under the 2013 Stock Incentive Plan, the 2007 Stock Incentive Plant and the 2001 Stock Incentive Plan. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 2003.
*10.10
Form of Performance Stock Unit Agreement for 2012 and 2013. Incorporated by reference to Exhibit 99.1 to Form 8-K dated March 29, 2012.
*10.11
Form of Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 8, 2007.
*10.12
Form of Directors’ Restricted Stock Unit Agreement. Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 10, 2010.
*10.13
Form of Key Executive Severance Agreement entered with seven current executive officers of Ducommun. Incorporated by reference to Exhibit 99.1 to Form 8-K dated January 9, 2008. All of the Key Executive Severance Agreements are identical except for the name of the executive officer, the address for notice, and the date of the Agreement:
 
Executive Officer
 
Date of Agreement
 
 
Kathryn M. Andrus
 
February 18, 2014
 
 
Joseph P. Bellino
 
November 5, 2009
 
 
Joel H. Benkie
 
December 13, 2013
 
 
Douglas L. Groves
 
February 18, 2014
 
 
James S. Heiser
 
December 31, 2007
 
 
Anthony J. Reardon
 
December 31, 2007
 
 
Rosalie F. Rogers
 
November 5, 2009
 


30

Table of Contents

*10.14
Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 1990. All of the Indemnity Agreements are identical except for the name of the director or officer and the date of the Agreement:
 
Director/Officer
 
Date of Agreement
 
 
Kathryn M. Andrus
 
January 30, 2008
 
 
Richard A. Baldridge
 
March 19, 2013
 
 
Joseph C. Berenato
 
November 4, 1991
 
 
Joseph P. Bellino
 
September 15, 2008
 
 
Joel H. Benkie
 
February 12, 2013
 
 
Gregory S. Churchill
 
March 19, 2013
 
 
Robert C. Ducommun
 
December 31, 1985
 
 
Dean W. Flatt
 
November 5, 2009
 
 
Douglas L. Groves
 
February 12, 2013
 
 
Jay L. Haberland
 
February 2, 2009
 
 
James S. Heiser
 
May 6, 1987
 
 
Robert D. Paulson
 
March 25, 2003
 
 
Anthony J. Reardon
 
January 8, 2008
 
 
Rosalie F. Rogers
 
July 24, 2008
 
*10.15
Ducommun Incorporated 2015 Bonus Plan. Incorporated by reference to Exhibit 99.1 to Form 8-K dated February 3, 2015.
*10.16
Directors’ Deferred Compensation and Retirement Plan, as amended and restated February 2, 2010. Incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended December 31, 2009.
*10.17
Employment Letter Agreement dated September 5, 2008 between Ducommun Incorporated and Joseph P. Bellino. Incorporated by reference to Exhibit 99.1 to Form 8-K dated September 18, 2008.
*10.18
Employment Letter Agreement dated May 3, 2012 between Ducommun Incorporated and Joel H. Benkie. Incorporated by reference to Exhibit 99.1 to Form 8-K dated June 4, 2012.
*10.19
Form of Performance Stock Unit Agreement for 2014 and after.
31.1
Certification of Principal Executive Officer.
31.2
Certification of Principal Financial Officer.
32
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 o